Central Banks Desperate to Force Savers to Spend Cash

Don't want to listen? Read the podcast below!

Welcome to this week's market wrap podcast, I'm Mike Gleason.

This week, central bankers embarked on a new and dangerous front in their all-out war on savers. The European Central Bank announced it would slash interest rates paid to banks on their deposits with the ECB to below zero. That's right, negative interest rates! Banks will have to pay 0.1% on their reserves held at the ECB.

The unprecedented move by European Central Bank chief Mario Draghi reveals just how desperate he is to try to nominally revive sluggish economic data points. By punishing banks for holding cash reserves, banks will be more likely to lend to individuals and businesses in order to generate a return on capital.

At the same time, banks will be less inclined to pay any meaningful rates of interest to holders of deposit accounts. The message to savers is crystal clear – spend your money, don't save it.

Artificially suppressed interest rates – something we've been seeing lots of for several years now -- are tantamount to theft. It robs savers of the value of their money, and it's occurring in the U.S. due to our central bank's ultra-low rates, just as it is occurring in Europe. When central banker Draghi was pressed by a reporter on this issue following the ECB rate decision, Draghi's awkward denial was just as telling as a candid admission.

German Reporter:

The President of the German Saving Banks Association is accusing the ECB of an expropriation of savers. What is your response to that criticism? Secondly, more generally, asked what is your message today to the German savers who suffer from very low interest rates?

Mario Draghi:

Let me address first the first question. I think there is a deep misunderstanding here. The rates that we've changed are for the banks, not for the people. Of course, commercial banks may react to our decision by choosing to lower their rates if they think they should do so. This would be then transmitted to savers, but it's not us. It's a decision taken by the banks, so it's completely wrong to suggest that we want to expropriate savers.

Even though the ECB's move to negative rates for bank reserves represents the crossing of an important threshold, the ECB refrained from dropping its main refinancing rate by as much as some had expected. The rate now stands at 0.15%, defying expectations that it would come in slightly lower at 0.1%.

As a consequence, the euro rallied following the ECB decision, reversing losses posted earlier in the week. The U.S. Dollar Index reversed to the downside on Thursday and now sits in slightly negative territory for the week.

This week's developments in currency markets may have given precious metals markets a bit of a catalyst to rally although just a hint of one. At the very least, the potential for a major breakdown in gold and silver prices has been thwarted – at least for now. Silver managed to close back over $19 an ounce on Thursday, while gold climbed back above $1,250 in overseas markets on Friday before the U.S. open.

At present, gold has dropped below $1,250 again and currently trades at $1,248, essentially flat for the week. Silver comes in at $18.98, good for a gain of about 0.5% on the week.

And for the second consecutive week, palladium is flirting with new multi-year highs, though prices haven't quite managed to punch through yet. Palladium looks to finish the week with a slight gain of about 1% as of this Friday morning recording and currently trades at $847 an ounce, just a few dollars shy of the high mark from 2011.

If palladium is leading the way forward, the other precious metals have a lot of catching up to do. In an environment of persistently negative real interest rates across the board – and even nominally negative rates on certain types of deposits – gold and silver can be expected to play catch up over time. The fact that gold and silver bullion pay no interest is normally thought of as a disadvantage. But 0% is a better than a negative rate!

European commercial banks may now be incentivized to hold reserves in gold rather than cash. And regardless of whether nominal rates set by the U.S. Federal Reserve ever go negative, which is something Fed chair Janet Yellen has floated as a possibility, our real interest rates may actually be more deeply into negative territory here than they are in Europe right now. That's because inflation gauges are running slightly higher here than in Europe.

We're starting to see some areas of the commodities complex come back to life and consumer prices tick up. Fed economists blame the weather, but these same monetary planners credit themselves for helping lift housing, banks, and the stock market from the brink. They don't want to ruin the party in financial assets that they've helped inflate, but keeping them inflated requires, well, more inflation. Whether the inflation shows up in stocks or in healthcare costs or in commodity prices, it's still inflation.

Over the past three years, we've seen a lot of inflation find its way into U.S. stocks. But even though the major averages are trading near record highs, it's not a secular bull market in stocks per se that's underway. It's a cyclical bull in stocks within a secular monetary inflation. The up cycle for stocks will eventually turn down, and the ugly side of inflation will start a new up cycle, if it hasn't already.

To protect yourself from the potential for dramatically higher food, energy, and other household costs in the years ahead, now's the time to bolster your household's bulwark of physical gold and silver. As always, Money Metals Exchange is happy to work within your budget and will individually process your bullion purchase with speed and care, no matter how big or small your investment.

Well that will do it for this week's Market Wrap Podcast, thanks for listening. This has been Mike Gleason with Money Metals Exchange reminding you that we remain fully committed to getting the most value for your depreciating dollar… with speed, with accuracy and with top notch service. Have a great weekend everybody.

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 80,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.